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Pabrai versus Pabrai
Posted by: David Pinsen (IP Logged)
Date: April 28, 2008 04:28PM

For those who didn't see this on the thread on the Guru News forum about Pabrai and SHLD, you may find this essay Mohnish Pabrai wrote in 2003 of interest, especially in light of his recent investment in Sears: "Retailers Aren't Worth the Risk". Below are some excerpts.

Retail innovation is a crapshoot with an extremely low probability of widespread success. Only a minority of entrepreneurs are able to identify the right gaps and then execute to take advantage of it. For every successful retailer, there are hundreds, if not thousands, of failed retail ventures and strategy initiatives.

Another big problem with retail is the transparency of the business. Sam Walton spent thousands of hours inside his competitors' stores. It's virtually impossible to have any trade secrets in retailing. Your competitors can walk into your stores and, in about 15 minutes, understand your entire business-model advantage and how to replicate it. There are very few industries that are as openly transparent, and that's problematic for the long-term investor.

[...]

If you invested in Wal-Mart, Home Depot or The Limited 20 years ago, your returns would be amazing. But there were virtually no data points two decades ago that would have given you any comfort that these arbitrage spreads were likely to still be there 20 years out. Innumerable highflying retailers from the 1980s aren't with us today.

As an exercise, think of any retailer that appeals to you as an investment today, identify the arbitrage spread it's exploiting, and ask yourself why you believe that gap will remain intact for 20 years, 10 years, or even five years.

[...]

If you're still attracted to any multibillion dollar retailer, take a look at an article I wrote entitled The Danger in Buying the Biggest. Size is a huge factor in future returns, and buying the biggest retailers is fraught with risk.

I'm reminded of a quote by Warren Buffett: "A horse that can count to 10 is a remarkable horse, not a remarkable mathematician."

It's likely that the retailers you love are the most remarkable horses. Your best strategy is looking for the most remarkable business.


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Re: Pabrai versus Pabrai
Posted by: km2387 (IP Logged)
Date: April 28, 2008 05:56PM

Dave,
The article you are talking about refers to retail as forever investment. SHLD is a pure value play, way below it's liquidation value. SHLD has 10 bil in inventory and 9 bil in PPE. Also, don't forget all brands like kenmore, craftsman, land's end, DieHard etc.
Big difference in what he says in interview and why he invested in SHLD now.


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Rating: 3.3/5 (6 votes)



Re: Pabrai versus Pabrai
Posted by: commodity (IP Logged)
Date: April 28, 2008 06:05PM

they always run out of room to grow

read Peter Lynch on this


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Rating: 4.0/5 (2 votes)



Re: Pabrai versus Pabrai
Posted by: Sivaram (IP Logged)
Date: April 28, 2008 07:08PM

I'm just a newbie with a questionable record but I gotta to disagree with Pabri on retailers. First of all, you wouldn't have dominant businesses like Sears Roebuck & Co several decades ago, or Wal-mart or Macy's now, if retailing was a bad business. Secondly, what he says is almost true of any other business. How is a retailer any worse than a financial company (say a small bank or a mortgage lender)? Or an industrial company? Or a technology company?

I also have to disagree with his thinking that retailers are bad because past performance is misleading. Well, isn't that the case with almost everything? I mean, if past history was good everywould would be blindly picking stuff based on the past performance.

I have zero access to Pabri's writings (except for the rare public stuff from years ago). I'm really curious about his Sears Holdings investment. Either he has changed his view on retailers (i.e. originally quoted article is not his present view); or he sees something that others don't.

Some investors invested in Sears for Eddie Lampert (a mistake IMO). Some invested for the undervalued real estate. But I'm curious why Pabri went into this situation...

---------
Check out my investing blog - contrarian with a macro focus and a value investing tilt: Can Turtles Fly? A Contrarian Investing Blog.


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Re: Pabrai versus Pabrai
Posted by: David Pinsen (IP Logged)
Date: April 28, 2008 07:09PM

km2387,

If you have a link to an interview or article where Pabrai explains his reasons for investing in SHLD now, please post it. Thanks.


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Rating: 3.1/5 (7 votes)



Re: Pabrai versus Pabrai
Posted by: David Pinsen (IP Logged)
Date: April 28, 2008 07:21PM

Sivaram,

"Some investors invested in Sears for Eddie Lampert (a mistake IMO). Some invested for the undervalued real estate. But I'm curious why Pabri went into this situation..."

I agree with you about it being a mistake to invest in Sears just because of Eddie Lampert, and I share your curiosity as to why Pabrai invested in SHLD. I got some heat for speculating this on the Guru News forum, but I wondered if -- after going solo on stocks like DFC and CCRT -- Pabrai sought the comfort of investing alongside other value investors in SHLD. Not only does Pabrai's investment in SHLD go against his negative comments about retailers in 2003, but it also goes against Pabrai's more recent claim (in interviews) that he prefers companies in about the $500 million market range.


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Re: Pabrai versus Pabrai
Posted by: augustabound (IP Logged)
Date: April 28, 2008 07:35PM

A lot would depend on what Pabrai views Sears to be. Is it a retail company such as WalMart or is it a holding company? I realize it's called Sears holdings but he refers to it as a retailer.
Like you mentioned above, has his view changed?
As to his quote about thinking about your favourite retailer in 10 or 20 years being still dominant, WalMart, probably. Home Depot, nobody knows. Sears, probably the same as HD, nobody really knows. I could see Sears retail arm not being here in 2030.


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Rating: 4.0/5 (2 votes)



Re: Pabrai versus Pabrai
Posted by: km2387 (IP Logged)
Date: April 28, 2008 07:56PM

Dave,
I don't think you need a link to see why Pabrai and alot of other value investors are invested in SHLD. And reading that article should be more of a proof why a person who thinks that retailor don't have a strong long term moat to be a good longterm investment. This is simply a stock that is trading below its liquidation value. You can take a look at the balance sheet and see for your self.
I guess you would call Buffett a hypocrite since he said he doesn't invest in tech because he doesn't understand it, but he put $500 mil in LVLT bonds few years back.






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Re: Pabrai versus Pabrai
Posted by: munger (IP Logged)
Date: April 28, 2008 08:15PM

I think he sees it as a real estate play. I wonder when Lampert is going to get tired of fooling around with the retail business and spin off the real estate into some separate entity. Either way the street doesn't seem to value the company as a real estate play and that is starting to become clear as SHLD becomes cheaper. I wiould spin off the real estate assets and downsize the retail assets as much as possible. Maybe even sell a few brands.


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Rating: 4.0/5 (2 votes)



Re: Pabrai versus Pabrai
Posted by: Thomas Macpherson (IP Logged)
Date: April 28, 2008 08:27PM

The quote about the horse is from Samuel Johnson....not WEB. Just thought I'd point that not every great quote in a Pabrai article is from the value guru.....


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